IRS Form 5405: Repaying the First-Time Homebuyer Credit

IRS Form 5405, Repayment of the First-Time Homebuyer Credit, is a tax document for individuals who previously claimed this tax benefit. The First-Time Homebuyer Credit was available for homes purchased in 2008, 2009, and 2010, with different rules for each year. For homes bought in 2008, the credit acted like an interest-free loan of up to $7,500, requiring repayment over 15 years. The form’s purpose is to manage repayment when certain life events accelerate the amount due. You do not file Form 5405 for standard annual payments; it is only necessary when specific circumstances change your relationship with the home.

Understanding the Repayment Obligation

The requirement to file Form 5405 is triggered by events that alter the use or ownership of your property. The main trigger is the disposition of the home, such as selling or transferring ownership to an unrelated person. If this occurs, the entire remaining balance of the credit becomes due in the year of the sale. The repayment amount, however, cannot exceed the total gain you realize from the sale, which means selling at a loss may reduce or eliminate your repayment obligation.

Another trigger for accelerated repayment is when the property ceases to be your main home, which is the one you live in for most of the year. Converting the property into a full-time rental or a vacation home are common examples of a change in use that would require you to file Form 5405. For those who claimed the credit for a home purchased in 2009 or 2010, repayment was only required if one of these events happened within 36 months of the purchase date. For the 2008 credit, these events trigger repayment at any point before the credit is fully paid back.

Exceptions to the Repayment Rule

Certain situations provide an exemption from the repayment obligation, even if you sell the home or stop living in it. One exception involves the transfer of the home to a spouse or to a former spouse as part of a divorce settlement. In this scenario, the person who transfers the property is relieved of the repayment duty, and the responsibility for any remaining repayments shifts to the spouse who receives the home.

Another exception occurs upon the death of the taxpayer who claimed the credit. If the taxpayer was the sole owner, any remaining repayment obligation is forgiven. If the credit was claimed on a joint return, the surviving spouse is responsible only for repaying their half of the remaining credit balance. This rule ensures the debt does not pass to the deceased’s estate or heirs.

An exception also applies to the involuntary conversion of the home. This includes destruction by a fire or natural disaster, or its condemnation or sale under threat of condemnation by a government authority. If the home is involuntarily converted, the repayment may be waived or limited. However, you may need to acquire a replacement main home within a set period, usually two years, to avoid triggering the repayment.

Information Needed to Complete Form 5405

To complete Form 5405, you must gather several pieces of information. You will need the total amount of the First-Time Homebuyer Credit you received, which can be found on your tax return for the year you claimed it. You must also determine the home’s adjusted basis to calculate your gain or loss on the sale, which directly impacts the amount of credit you must repay.

• The date you originally purchased the home
• The date the home was sold or when its use as your main residence ended
• The final selling price of the home
• The home’s adjusted basis, which is its original cost plus the cost of any significant improvements you made

Filing Form 5405 with Your Tax Return

After completing Form 5405, you must file it with your annual income tax return. The form must be attached to your Form 1040 or Form 1040-SR to ensure the IRS can process the repayment calculation.

The final repayment amount from Form 5405 must be reported on your tax return. This amount is carried over to Schedule 2, “Additional Taxes,” which is filed with Form 1040. The total from Schedule 2 is then included in the tax calculation on your Form 1040, increasing your total tax liability and either reducing your refund or increasing the taxes you owe.